Crony Capitalism
This article is part of the Intermediate course on Libertarianism and the Austrian School of Economics -> State Interventions
Last updated: 2026-08-20
"Crony capitalism" (known in the English-language literature as crony capitalism) is an economic and political system in which financial and business success does not depend on "efficiency, innovation, or the capacity to satisfy the consumer in a free market", but on relations of complicity and mutual favors between entrepreneurs and rulers.
From the perspective of institutional economics and the Austrian School of Economics, this phenomenon is not considered a "system error" or an accidental distortion of genuine capitalism, but the logical and inevitable consequence of granting the State the power to intervene discretionarily in the economy.
"Crony capitalism" is basically a Modern Mercantilism.
"Crony capitalism", "state interventionism", "State Intervention", "State that guides the Economy", and "Modern Mercantilism" are practically synonyms.
By definition: "Free Market" is the opposite of "Crony Capitalism".
How does the mechanism work? (The rent-seeking cycle)
When governments have the power to grant subsidies, regulate prices, impose protectionist tariffs, or distribute public contracts, the incentive of entrepreneurs changes radically:
- Instead of investing resources in improving products or reducing costs in order to compete, it is much more profitable to invest money and time in lobbying, financing political campaigns, or corrupting officials.
- In exchange, politicians obtain financing, votes, or media support, and the selected entrepreneurs obtain exclusive privileges (legal monopolies, barriers to entry for competition, financial bailouts).
Historical and contemporary examples
This phenomenon takes multiple forms around the world:
1. The 2008 financial bailouts (Too big to fail)
During the global financial crisis, the governments of the United States and Europe decided to bail out with public funds large investment banks and corporations that had taken irresponsible risks.
- The crony reading: The private profits of the good years were kept by executives and shareholders; the losses of the bad years were socialized among all taxpayers. The smaller and more competent firms that went bankrupt received no help because they had no direct line to the Federal Reserve or the Treasury.
2. The Military-Industrial Complex (United States)
Originally denounced by President Dwight D. Eisenhower in his farewell address, it refers to the close and symbiotic relationship between the U.S. government, the armed forces, and the large defense-contractor firms (such as Lockheed Martin, Boeing, Raytheon).
- Dynamic: Multibillion-dollar military budgets are approved —often financed with debt or taxes— not necessarily because of a strict defensive need, but to guarantee lucrative contracts to specific firms that employ retired politicians and finance key electoral districts.
3. The "national champions" in Latin America
In several countries of the region (with recurrent examples in Argentina, Brazil during the PT governments, or Venezuela), governments have pushed "national champion" policies.
- Dynamic: Certain business conglomerates or public-works contractors are hand-picked to turn them into regional giants through soft credits from state banks (such as BNDES in Brazil), tax exemptions, and direct awards without transparent bidding. The clearest case at the global historical level is that of the systemic corruption scandals (such as Lava Jato), where inflated public works were the vehicle for channeling returns to political parties.
4. The Russian oligarchs of the 1990s
After the fall of the Soviet Union, the process of massive privatization of state assets was not done by opening markets to global and local competition, but by handing over the most lucrative sectors (oil, gas, mining) to a reduced group of people with direct connections to the Kremlin’s circle of political power in exchange for political and financial support.
The great difference: Free-market capitalism vs. Crony capitalism
Market capitalism (of free enterprise):
It is based on private property, freedom of contract, and open competition. The entrepreneur succeeds if, and only if, he offers a good or service that consumers choose voluntarily over the others. If he goes bankrupt, he assumes his loss.
Crony capitalism (modern mercantilism):
It is based on state privilege. The entrepreneur succeeds by a decree, a tailor-made law, a subsidy, or a tariff that destroys his competition. Gains are private, but losses are public.
The distortions of this Modern Mercantilism are so large that they reconfigure Industry in the country that produces them, as will be seen later: Unsustainable Investments and economic inefficiencies that generate more poverty.
This article is part of the Intermediate course on Libertarianism and the Austrian School of Economics -> State Interventions
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Last updated: 2026-08-20
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